This is an apt metaphor for the U.S. economy and stock market.

The stock market came roaring out of the gate on Trump’s election, causing business confidence and with it spending and hiring to pick up in 2017. But when the drums of the trade war started beating in February of 2018, the stock market and the economy lost Big Mo.

There were some bright spots over the summer months, but the negative trade headlines that dominated the news cycle in the fourth quarter drained the stock market and big business of confidence and dashed any hope that momentum would return.

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Although the current economic numbers are good, the upward momentum is gone. Some sectors are even in decline.

Auto sales are down approximately 500,000 from 2017. Home sales have fallen sharply, and the thin supply of homes on the market isn’t all to blame. In fact, new home supply is higher than a healthy balance requires. Jobs data has been good, but gains in the monthly average payroll are slipping. Retail sales are still running at a healthy pace roughly 4% on a year-over-year basis but that is down from the 6.0%-6.5% pace from April through August of 2018.

The upward slope of the past few year s has plateaued or i s trending down.

If the U.S. trade war with China continues to heat up, the downward slope will steepen. Uncertainty is a momentum killer, and the longer there is uncertainly around trade, the harder it will be to recover from the damage.

Uncertainty is a momentum killer, and the longer there is uncertainty around trade, the harder it will be to recover from the damage.

Unfortunately, a resolution of the trade war will only delay the inevitable economic slowdown. Stocks will rally, but I suspect it will be a short-term event. I wrote about some of these things in the last quarterly issue of Credit Union Strategy & Performance, and I believe the loss of forward momentum has become entrenched. Once you lose momentum in a market or economy, it’s hard to get it back.

I expect we’ve seen the last rate raise from the Fed for at least two years. In fact, I think we’ll see one or two easing moves in 2019 and more beyond. I also believe we’ll see longer-term rates decline but only marginally. The massive supply/demand shift in the bond market will limit rate declines even in a weaker economic environment. Exploding deficits will continue to cause exploding treasury issuance, which will be difficult to overcome. The long end of the bond market is still no bargain.

Of course, I could be wrong. What would it take to turn this prediction around? What would the economic and interest landscape need to look like?

First, the United States needs to strike a real, good trade deal with China sooner rather than later. The stock market needs a big, sustained rally. Business confidence needs to be restored, and the companies that lowered their 2019 earnings projections late in 2018 need to raise them once again. The housing market needs to trend higher, and auto sales need to move up a level after last year’s stall.

On the interest rate side, the Fed needs to tighten three times by the end of 2019, and the 10-year yield needs to move close to 4%. Credit union lending needs to remain strong, but interest rate risk might be a concern.

I hope I’m wrong in forecasting a weaker economy. If I am off, we’ll all be better off. But I’m relatively confident in my outlook, so ready those slowdown strategies. After all, downside momentum can be just as strong as upside momentum.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

This article appeared originally in Credit Union Strategy & Performance. Read More Today.

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If the tariffs by the United States and countermeasures by China are in place, the U.S. economy should start seeing negative effects by the end of the year. The United States has a domestic-centric economy, and it will not turn on a dime. The economy improved last year before the tax cut, and it’s still working off the benefits to corporations. But how the stock market reacts to tariffs will impact business confidence.

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The surge in confidence, for both businesses and consumers, after the election was based on the upward explosion of stock prices. Businesses felt comfortable spending and hiring for the future, anticipating the benefits from lower taxes. A loss of confidence such as from a trade war that will cause stocks to retreat will also cause businesses to scale back and save for a rainy day. Ditto for consumers.

Most sectors of the economy are at levels that are comfortable but no longer growing. That lack of growth will begin to worry businesses early next year with or without a trade deal.

As for when a recession might come, your guess is as good as anyone’s. Mine would be for an extended slowdown, with a recession officially being called in the fourth quarter of 2019. Now let’s imagine a world where the trade war is averted.

Sounds great, right? Onward and upward for who knows how long!

I don’t want to rain on anyone’s parade, but I believe the economy would still face a slowdown next year. It might come later than it would if we were in a trade war, and it might not be as deep, but the odds still favor a slowdown.

wish I could point you to specific charts or databases to support that case, but I can’t. I can, however, give you my reasoning and hopefully something to think about.

Yes, a China solution would lead to a big short-term stock rally and perhaps allay any growing fears on the part of businesses. But will that lead to another spending boom? I don’t believe it will, and I believe the economy is already showing signals it is getting somewhat maxed out.

Let’s look at autos, jobs, and housing. Auto sales are good, but sales are down slightly from last year. Looking back over three years, it’s clear that sales have plateaued and there is little reason to expect a boost. Employment numbers remain solid, but the labor pool is too shallow to handle a surge in growth. And businesses are not providing training to fix the skills mismatch that is holding down employment growth.

This year’s selling season for homes was a bit of a disappointment, too. Tight supply explains some of the weakness, but that’s not the full story. Many potential buyers are simply walking away after getting frustrated with trying to buy in a hot market. Prices are simply too high in many markets to sustain growth. One area that shows real evidence of slowing, not based on tight supply, is in the sales of new homes. New home sales have struggled the past few months, even with an increase in homes available for sale. The supply of new homes on the market has reached a normal supply for the first time since 2008. Sales aren’t terrible; they’re just flat.

The theme here is plateauing.

Most sectors of the economy are at levels that are comfortable but no longer growing. That lack of growth will begin to worry businesses early next year with or without a trade deal.

The tax deal is done, and the deficit is too big for more fiscal stimulus. What could take the United States to the next level? Right now, I don’t know.

The trade issue is important, but its role is in how fast we get to the next crucial stage of the economy. It likely won’t matter for our ultimate destination.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

This article appeared originally in Credit Union Strategy & Performance. Read More Today.

The post 3 Signs The Economy Has Hit A Plateau appeared first on CreditUnions.com.

The talk of the flattening yield curve has been a hot topic this year, especially by Wall Street types who have never studied the history of the yield curve. To hear some of them tell it, the current relatively flat yield curve will lead to an inverted curve and cause a recession. The only part of that sentence that is true is that the curve is relatively flat.

First, an inverted curve is a symptom of a possible recession, not a cause. The curve inverts because bond traders sense the Fed has pushed too far and is staying tight too long. Second, a flat curve and even occasional short-term inversions mean nothing alone and can last a very long time. ContentMiddleAd

Starting in late 1994 through 1996, the yield spread between the 2-year and 10-year note was roughly 40-50 basis points, approximately the spread this year. In 1997, that spread was down to 20 basis points and even flat from time to time. From 1998 through 1999, the spread was roughly 10 basis points with several short periods of inversion. In February 2000, the curve finally inverted and stayed inverted. The bond market was correct in that the economy did weaken later that year, but a recession didn’t kick in until 2001.

When you hear the hoopla on the yield curve, please remember that a true inverted curve from beginning to end must be in place and must last at least six months to be an accurate forecast of recession. The yield curve can stay flat and go through brief inversions for a very long time. If you want to be prepared for a recession, watch for a flat curve; however, look at it within the context of other factors in the economy and not as a stand-alone predictor. This second topic I’ll address from the viewpoint of a consumer and credit union member: Hey credit union, what’s up with the low rates?

My warning to the movement’s leaders is to make sure members aren’t jumping ship.

With some exceptions, deposit rates at most credit unions remain stubbornly low after 150 basis points of Fed tightening. It’s not a surprise. It’s hard to pull that trigger that will squeeze interest rate margins until the credit union must, and most industry leaders probably don’t think they have to yet. Other credit unions and banks are playing the same game and a canvas of nearby competition might suggest the credit union is in line with its competition. But are you sure you are not springing a leak in your deposit boat?

The top money market account rate at my credit union is 0.40%. That seems to be in line with other credit unions and might be competitive in your market, but let me give you my personal experience. For the past year or so I have put my cash in a staggered maturity of T-bills. My last buy was a six-month T-bill at 2.00%. I had not bothered to check the money market rate at my brokerage until just recently, as the various money market rates there were stubbornly low for a while. When I looked at the rate for checking, it was 1.74%.

Some banks are waking up, too. I have had multiple solicitations, mostly from online banks, for money market accounts at rates well above 1%. Just a couple of days ago I got an old-fashioned snail mail glossy card from a large California bank not Bank of America or Wells Fargo with local branches offering me 1.50% for a $10,000 minimum. The rate is guaranteed not to drop before June 2019, but it can go higher. It also offered a one-year CD for 2.25%.

So, I can put money at my credit union for 0.40% or go to multiple other platforms for four to five times that rate. What would you do?

Perhaps most consumers simply haven’t woken up to what is out there, or maybe the higher rates are not widespread. My warning as a member to the movement’s leaders is to make sure members aren’t jumping ship. You might not need them now, but you might when the waters get choppy.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

This article appeared originally in Credit Union Strategy & Performance. Read More Today.

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Also this morning, the Bureau of Economic Analysis released the Fed’s preferred measure of inflation, Core PCE (personal consumption expenditures). It was up 0.2%, which is in line with expectations. Personal income rose by 0.4%, and spending rose by 0.2%, both as expected. The Department of Labor released the numbers for weekly jobless claims, which fell 12,000 to 215,000 another new all-time low.

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But the numbers had no market impact. Unless there is a miracle rally today, the Dow and S&P will record losing quarters, breaking an eight-quarter streak. The NASDAQ might eke out a small gain. Given fresh memories, this might seem like it was a horrible quarter, but the losses are relatively minor, on the order of 2-3%.

With March and the first quarter out of the way, the markets might be ready to focus on something new in April. How about watching earnings for stocks and the economy for bonds? If traders do, they might realize earnings are still good, and the economy is doing well. April will be a critical month for more developments on trade. If the headlines remain positive on trade, April could be a much calmer month. If the headlines turn sour, March will have served as a practice run for what is to come.

This is my last daily comment for The Trust for Credit Unions. Thank you for reading my sometimes random, rambling thoughts. I hope I have helped you to see through the smoke and confusion that often surrounds the markets and better understand what really matters to the economy and interest rates. Finally, I hope I’ve been able to occasionally provide a smile or a chuckle something we all need more than the latest GDP number.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

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The Trump team has said this is Part 1 of a package of moves it intends to take. China will remain enemy No. 1, but the other parts of the package are likely to include more countries. If the steel and aluminum tariffs were a warning shot in a trade war, this new package is the first real shot.

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In Fed news, Jay Powell, the new chair of the Federal Reserve, was cool, calm, and collected during his first press conference. But it was clear he is not an economist. He refused to commit to any particular economic trigger numbers for ramping up tightening moves. He basically said he would know the economy was overheating when he saw it, and he doesn’t see it now or in the near future. When questioned about the movement of the dots, he downplayed the meaning of the dot game. I was especially glad to hear that.

Read more about the Fed economic forecast and movement in stocks and bonds.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

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The Dow is down 578 points this week, despite the fact economic data has been OK this week and last Friday’s jobs report was terrific. What seemed to plague the stock market Wednesday was a surge in trade worries. Although the market was cheered by Trump’s apparent softening of tariffs last week, there is still plenty to worry about.

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Here is a summary of those worry points:

1. Peter Navarro is clearly in charge of trade, and he will not be satisfied with the small steps taken. This is simply his first shot.
2. There’s a story making the rounds that the White House is preparing to unleash a second round of tariffs next week, but this time they will be directed solely at China.
3. China has not said a lot about the United States’ moves, but that silence will not last if we hit it a second time. Analysts have lists of ways that China could retaliate, and it could get very ugly very fast.
   

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4. After having a day to think it over, traders also started to worry about Trump’s pick for Secretary of State. Mike Pompeo’s focus might not be trade, but he has been a vociferous critic of China and that’s putting it mildly.
5. Traders did like Trump naming Larry Kudlow to replace Gary Cohn as chief economic adviser, but that did not get too much mileage. Kudlow is a free trade guy, but in the past couple of weeks of has warmed up to the idea of targeting China. All we can hope is that Kudlow can contain some of Trump’s and Navarro’s worst impulses on trade.

Read more about the bond market and economic reports.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

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First, bullish traders continued to anticipate an economic slump. It never happened, but that was the consensus, and the Fed supported that by keeping rates too low for too long.

Second, and more important, the Fed placed a heavy hand on the scales by buying almost $4 trillion in securities and distorting the pricing of bonds. That’s now going away. The Fed will be out of the buying business in 2018, just as the Treasury’s funding needs explode to the upside. The bullish bond crowd is living in the past and in denial of how much the supply/demand equation will shift and tip the scales toward higher rates.

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The Fed did not add to its portfolio in 2017, but it did re-invest the interest and maturing proceeds. That amounted to roughly $500 billion in a combination of treasuries and mortgages. Coincidentally, the net new issuance of Treasurys was approximately $500 billion an even trade in dollar terms.

The Fed started reducing the rollover in the fourth quarter of 2017 and will be out of the markets in the fourth quarter of 2018. At the same time, net new issuance of Treasurys this year will reach $1 trillion, according to the Treasury, and likely will hit $1.2 trillion next year. How will the bond market handle this massive swing?

If the economy takes a dive and drags down the stock market, no problem. Treasuries will be the hot ticket again. Otherwise, it will be up to the market to price bonds the old-fashioned way, by pricing them against inflation.

If inflation remains in the 2% range, that would imply a 10-year rate of 3.50-4.00%. There is nothing too scary about that. Things will only get scary if inflation hits 3%.

No natural forces such as wages or commodity prices would cause that much upward pressure on inflation. But, there is one thing that could tip the balance toward higher inflation a trade war.

One of Trump’s key talking points during his campaign was on what he saw as unfair trade agreements. He focused his rants on China but also targeted the trade practices of the United States’ closest allies and trade partners, Canada and Mexico.

It was more talk than action last year. That changed this year.

Trump’s surprise announcement in March of harsh tariffs on steel and aluminum ignited fears of a full-blown trade war. Those fears were quelled when the tariff proclamation excluded several key allies, but I don’t believe we’ve heard the last of this.

The elevation of vociferous, antitrade aide Peter Navarro to Trump’s key advisor on trade shortly before the tariff announcement is a bad omen. You can read Navarro’s books if you want to know just how much of zealot Navarro is on trade. Navarro will not be satisfied with these limited tariff actions. Navarro will agitate for more, and perhaps dangerous, action.

I won’t dive deep into all the ways the United States will lose much more than it gains in any trade war, but the bottom line is that inflation would rise. And it would not stop at 2.50-3.00%.

The costs of the imported goods we consume would rise sharply, and we cannot create overnight the facilities here to replace these goods. It took decades for manufacturing jobs to shift overseas, and it would take decades to bring them back. More importantly, the price of goods we produce here will rise as so many of the basic materials and components our manufacturers use are foreign-produced.

As another unintended consequence, demand for our exports both manufactured goods and intellectual products would shrink dramatically, putting far more jobs at risk than replacing foreign goods would create. The stock market would tumble. Business spending and hiring would, too.

This could be a very big deal. It will matter to interest rates and, more importantly, to credit union members. This should very much be on the radar of industry leaders. The best-case scenario is that only one of the scale-tippers, the supply/demand equation, comes to pass. If both are realized, the scale won’t tip, it will topple.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

Strategy & Performance 4Q 2017

Credit unions delivered exceptional value to members in 2017. Membership growth continued to accelerate as credit unions added more than 4 million net new members during the year. Market share in auto and mortgage lending increased. Loan growth reached into the double-digits for an unprecedented fourth consecutive year. And member relationship measures, including product usage and average balances, reached new highs. But with success comes greater attention. In this issue of Strategy & Performance, learn why the credit union difference is in the mission.

The post Tipping The Scale appeared first on CreditUnions.com.

There is no need to talk of caution in the bond market, however, as bonds have exhibited nothing but caution. Although the bond bull contingent remains the largest, it has lost some members. There have been no major sellers in the market that would indicate the bulls are capitulating, but bonds aren’t attracting new buyers, either, at the higher rates. Bond prices were lower to start the day.

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News From Washington

Congress is saying it will vote today to pass a one-month spending bill to avoid a government shutdown on Friday, but the vote is too close to call. If Congress is having this much trouble passing a spending bill, what will happen when it’s time to pass a debt ceiling bill?

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

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Readings On Today’s Economic Releases

The first of today’s economic releases are out. Weekly Jobless Claims rose by 19k to 275k. The claims numbers will be getting more volatile over the next few weeks as seasonal workers and weather factors start coming into play. The second revision to third quarter GDP kicked the number up to 3.5% vs. expectations of 3.2%. The preliminary release was 2.9%. This is the best GDP reading since the first quarter of 2014, but it’s ancient history.

The ever volatile Durable Goods Orders headline number came in at4.6% vs. expectations of -4.0%. The tamer and more closely watched ex-transportation component rose by 0.5% vs. expectations of 0.2%. All in all, a good batch of numbers but none of which will matter to traders.

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Later this morning Personal Income and Spending will be released. This report is also unlikely to get much of a reaction unless the inflation component in the report goes far astray of expectations.

The markets feel done for this week. Tomorrow should be even slower, and the bond market closes early. Dow 20,000 before Christmas? It’s certainly doable, but traders are going to have to dig deep and find some Christmas spirit tomake it happen.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

The post Markets Take A Cue From “Silent Night” appeared first on CreditUnions.com.

For the past five years, including the 2018 forecasts, economists have been projecting a stronger economy. They’ve also drawn the logical conclusion that rates would rise because of this. Economists have been absolutely right on the economy and absolutely wrong on interest rates. They did score a victory in 2017 on the rise in the funds rate, but longer-term rates undershot projections.

Now, economists are predicting an improved economy boosted by the tax reform bill and are looking for a funds rate of 1.75% to 2.00% and a 3.00% 10-year note rate by the end of 2018.

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The bond trading crowd has been forecasting economic gloom for the past five years to justify why rates would stay low or go lower. They have been dead wrong on the economy but right on rates.

Bond bulls don’t like to admit it, they prefer the fundamental argument of economic gloom and doom, but the real reason they have been right on rates is because of central bank actions: ultra-low rates extending far beyond the need combined with massive securities purchases.

The result? Central banks have destroyed any credibility of the yield curve.

The yield curve has been on a flattening trend for some time. Bond traders are predicting the yield curve will flatten further in 2018 as the Fed raises the funds rate but longer-term rates stay low. How about a year-end funds rate of 2.00% and a matching 10-year note yield rate?

Central banks have destroyed any credibility of the yield curve.

Or, there is another non-consensus scenario I am beginning to lean toward. How about a year-end funds rate of 1.50% and a 10-year note rate of 3.50%?

This forecast starts with the Federal Reserve board. Incoming chair Jerome Powell was appointed to the board by President Barrack Obama but was nominated to serve as chair by President Donald Trump. Powell is considered a Yellen clone, but we don’t know how he will act when he assumes his new role. Until now, he has been in a subordinate role. He is a Republican and has no economic or market background. There is nothing Yellen-like about that.

Trump has already filled two vacancies on the seven-person board and has two more slots to fill. That means Trump will have the board chair and four of the six remaining seats. Although the Federal Reserve board is designed to be non-political, let’s get real. Will this board really take actions next year that could run counter if not negate the impact of Trump’s tax bill?

With the Fed’s increase in the funds rate in December, the Fed has, for the first time in nine years, A change in the funds rate and 10-year note would bring the yield curve back into the realm of normal after years of being out of bounds. achieved a neutral policy. The funds rate now matches the Fed’s preferred rate of inflation, the core personal consumption expenditures (PCE) index. If inflation doesn’t rise early next year or rises only modestly, the Fed could refrain from tightening regardless of the economy.

This would undermine the bond bulls’ case that the Fed would go too far in tightening. But the bond bull case will take another hit next year. Unless something dramatic happens, the Fed will be out of the securities buying game completely by the fourth quarter, and the European Central Bank’s purchase program will be winding down.

The two biggest buyers of bonds will be all but gone. In the meantime, the U.S. deficit will require significant new funding.

A too-loose Fed combined with a shrinking buyer pool should equal a bond bull revolt. A 1.50%-1.75% funds rate and a 3.50% 10-year note rate would bring the yield curve back in the realm of normal after years of being out of bounds.

This normal forecast is certainly an outlier, but isn’t it time for something different and something normal?

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

Strategy & Performance 3Q 2017

Credit unions have made significant gains since the Great Recession started 10 years ago. Third quarter credit union growth trends surged past that of community banks and the overall banking industry. Measures such as loans, shares, capital, and membership have all reached new levels. These gains are all notable and meaningful; however, they are backward-looking. The important question to ask is: Where will credit unions be in the next 10 years? In this issue of Strategy & Performance, learn why now is the time for credit unions to challenge themselves.

The post Something Different For 2018 appeared first on CreditUnions.com.